Subscription Business Model – Customer retention essentials.

~ 4 min read | May 26

It is hard enough for start-ups to make customers believe. They take a leap of faith to subscribe to your service and then starts the challenge of customer retention.

“The average firm loses half its customers in less than five years.”— Philip Kotler, Marketer

This was true in the traditional model.

In the traditional product one time sale model, the focus is on the life time value of the product itself. In the subscription model the focus has shifted to the lifetime value the customer derives as they use the service month-on-month.

You may be deliberating the choice of yearly payments versus monthly charges. The lower the charges, the lower the entry barrier for customers to subscribe to service, as it is much easier to pay lower amount.

And some merchant account providers, do hesitate to underwrite businesses that charge annually without some track record. The risk for them is, you sell x number of customers say at $100/yr each and after 3 months go out of business, then they are at risk of getting charge backs for x*$100 and nowhere to recover the money.  So the monthly subscription model is much more lucrative for businesses, easier for customer’s pockets and less riskier for merchant account providers.

However they are few challenges in this monthly subscription model.

1. Customer retention

  • Retaining existing customers is a challenge and the customer drop-off could be happening due to any number of reasons.
  • Support responsiveness. Consider using a helpdesk service like Freshdesk that can be your eyes & ears listening to conversations happening about your company in the social media.
  • Subscription renewal. If you are using a service that requires customers to come & authorize any change in transaction amount, the drop off rates could be very high. Ex: PayPal has this limitation.
  • Credit Card failures – By industry standards, 5 to 15% of credit card transactions fail. Automation & handling of failures is essential to take time action. Ex: credit limits require retry every few days before you want to mark invoice as unpaid.

2. Reacting to competitor’s pricing changes.

  • Recently, one of the SaaS providers introduced a freemium model & a different metric based pricing in a space dominated only by pay-per-user license space. Your billing system should be able to tackle such disruptive changes & retain customers.

3. Some customers are more special.

  • For few customers you may be tempted to give steep discounts, to get their logos in the initial days.
  • And to scale you may offer coupons & special discounts for customer acquisition. But it is important that it does not bite you back in a way it affects your sustainability.
  • You probably could invite new customers by offering a limited period discount, rather than perpetual discount. If your customer see the value, they may be willing to pay full price. But it is important your system can track & apply the charges correctly in the invoice.

4. Building trust with accurate billing.

  • The other part of customer support is the billing support. A sensitive area that touches the nerve when there is erroneous billing. It is important to ensure the billing remains accurate in spite of all the flexible & varying charges.

5. Price changes.

  • Most businesses need the flexibility to change price to arrive at the correct price point. Your marketing / sales team would need this flexibility to test waters.
  • It is very important to ensure you grand-father in existing customer plans. Ideally you should  continue to support them at current price point. If it becomes absolutely essential for you to revise price, make it a point to engage with them and explain why you are doing what you are doing.

These are just few basic points considered essential to retain customers. There are several metrics that should be measure to give a good indication on what needs to be corrected. That is for another blog.

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Krish Subramanian

Co-founder & CEO at Chargebee